The Questor column

The Questor column

Edited by Harry Wallop

(Filed: 22/10/2005)

Fund management sector promises princely rewards

With Prince William joining HSBC's private client business as a graduate trainee, Questor thought it was time to take a look at the fund management industry.

His appointment has done nothing to dispel the image that private client fund managers are exclusively public school males, who lack the ambition to become a hedge fund manager or investment banker.

Or so the image goes. However, the industry is a dynamic one, which has undergone big changes over the past year. If you believe the market is experiencing no more than its normal October wobble, then the listed fund managers make for an interesting investment. They can act as proxy for the whole market - more risky than a tracker, but they also enjoy more potential upside.

The industry had £226billion of assets under management by the end of last year. This sounds a lot but is just 7pc of the total assets owned by UK citizens (excluding their homes). The great challenge for fund managers is to persuade individuals to hand over a greater proportion of their wealth. The worry is that over recent years fewer people seem to trust their assets with fund managers, as the graph shows.

However, next year's changes to self-invested personal pension schemes (Sipps) present an opportunity for fund managers. If pensions can achieve the "must have" status that personal equity plans (Peps) and individual savings accounts (Isas) achieved, then the amount invested in pensions could return to its previous trend of tracking the level of personal wealth.

The other great hope for the industry is that more investors are choosing to go with a discretionary manager, rather than an advisory one, as the graph also shows. This means they are handing over assets to a manager who, within certain parameters, makes his own decisions.

This is far more profitable business for fund managers, as each new client adds to the manager's assets, but does not add to his costs.

But which shares should you buy? There are 150 fund mangers, but only four big players: Brewin Dolphin, Charles Stanley, Rathbones and Rensburg Sheppards, which are all in fact relatively small. There has been a wave of consolidation in the sector, with Rensburg merging with Carrs Sheppards. More mergers are likely, which helps share prices.

Helpfully, Katrina Preston at Bridgewell this week issued a report on the sector, highlighting which private client fund managers are good value. Her view is that Rensburg's shares, at 636p, are too expensive and the merger has yet to prove itself.

Questor shares her view and thinks the shares should be avoided. The other three are all attractive, especially Rathbones with its pure discretionary model and high profit margins. It is also a possible takeover target so the shares, at 838p, rate a buy.

Brewin Dolphin, whose shares are 126p, and Charles Stanley, at 265p, have substantial advisory assets, but both are converting clients to the discretionary mandates, which is helping revenues grow faster than assets. Both are worth a look.

Small cap values

Indigovision

Those with long memories and rose-tinted glasses will remember Indigovision as one of the great dotcom shares that promised much. Indigovision was a pioneer of CCTV security surveillance systems that used the internet rather than tapes.

Fears that the country was turning into Big Brother, with cameras on every street corner, made the shares very popular. The Edinburgh-based technology company was worth £217m when it floated on the stock market in 2000. Five years on, it is still loss-making and worth £42m.

However, the company looks to be finally delivering on its early promise. Turnover increased by 60pc last year to £3.6m, with some major contract wins including the security systems for the Athens Olympics and the G8 summit at Gleneagles.

The company is due to break even this year. The shares have started to recover and have doubled to 187p over the past five months. However, they are still worth a punt.

Dechra Pharmaceuticals

Questor has been a fan of this pharma company, since tipping it earlier this year at 198p. This week the shares hit 252p after the board confirmed that it was trading well.

Dechra is a pooch pharma, making and distributing drugs for dogs through vets, and has made a successful move into the US.

This is a highly cash generative company and pays out a dividend which should yield 2.3pc.

The shares now trade on a full rating of 17.5 times estimated earnings. This is not cheap but there should be some further upside from here. Hold on.

Carter & Carter

So good they named it twice. Carter & Carter is proving to be quite a hit, with the shares climbing over 40pc since floating on Aim in March.

The company, set up by chief executive Phillip Carter and his wife, trains school-leavers to become car mechanics. It has won some big contracts, including with Daimler, proving that employers trust the quality of its training. It plans to expand into other areas.

Courses are financed with cash from central and local government. The company should flourish with the Government's increasing desire to outsource education to the private sector.

Last week's full-year results showed that operating profits are up 47pc to £11.1m. At 376p, the shares are not cheap, barely paying a dividend and trading on a forward multiple of 14, but they are worth it. Buy.